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Buffett's Words of Wisdom

When fear overwhelms you, heed the advice of investing masters.

When you mention Benjamin Graham, Warren Buffett, and value investing in the same conversation, you're likely to get everyone nodding and going along with what you say. That's because agreeing with a philosophy is the easy part. But actually understanding and applying the approach of that philosophy is another story.

Aside from what he's currently buying and selling, Buffett has no investment-related secrets. If you read Graham's The Intelligent Investor and Security Analysis, along with everything Buffett has written, and then work on truly understanding and applying their principles to investing, you should be able to outperform the vast majority of investors.

Graham sums up how to invest intelligently when he says, "Investment is most prudent when it is most businesslike." Apply that reasoning to your investment considerations, and you will already have a head start. But to elaborate on that idea, let's turn to some words of wisdom from the Oracle of Omaha himself.

"I am a better investor because I am a businessman and a better businessman because I am an investor."

Running a business and making an investment go hand in hand. It's that simple. You wouldn't buy a business based only on rapidly increasing profits, nor should you invest in a company on that one metric. Instead, the prudent businessperson and the intelligent investor would scrutinize the balance sheet and determine, for example, whether earnings growth has been coming at the expense of increased receivables as a result of poor credit policy. Furthermore, as any businessperson realizes, earnings are easily manufactured, whereas cash is real.

Buffett's 1973 investment in Washington Post(NYSE:WPO) is a wonderful example of a businesslike approach to investing. The idea was simple. The Post owned a wonderful collection of media assets that Buffett concluded were worth about $400 million. The company, meanwhile, was selling for just $80 million. Was it a great business? Yes. Was there a satisfactory margin of safety? Yes. Case closed.

"Never ask a barber if you need a haircut."

Here, Buffett was alluding to investment bankers and analysts. Let's face it: These folks get paid when you buy what they're selling. To be fair, there are many excellent investment bankers and analysts who truly offer a valuable service. Buffett's illuminating point was that you already know the answer you're going to get, and it will be determined by everything but rationality.

"I don't try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over."

Buffett's critical advantage over the pack is that he focuses on the boundaries of his circle of competence rather than the size of his circle -- although his is still probably bigger than most. It's illuminating that one of the most talented investment minds of our time made the bulk of his fortune through businesses such as insurance via GEICO, soft drinks via Coca-Cola(NYSE:KO), candy, razor blades, and a host of others that are simple to understand.

"We don't get paid for activity, just for being right. As to how long we will wait, we'll wait indefinitely."

Buffett has always said you should never allow the stock markets to guide you, because the market is really there to serve you. One of Buffett's greatest attributes is that he can be patient about investments until the time is right, regardless of how long that time may be. In one case, Buffett waited nearly four years to make a significant move -- in 1970, he folded his partnership and made virtually no public-market investments until 1974, when the price-to-earnings ratio of the S&P went from around 20 to 7. At that point, Buffett began buying all over the place.

During that time, Buffett became famous for saying, "I was selling stocks at three times earnings to buy stocks at two times earnings." The approach worked: Berkshire Hathaway(NYSE:BRK-A)(NYSE:BRK-B) shares rose from $40 to $420 per share from 1975 to 1980, for about a 57% annual rate of return!

More recently, despite a new investment in NRG Energy(NYSE:NRG) and increasing its stakes in Sanofi-Aventis(NYSE:SNY) and Ingersoll Rand(NYSE:IR), Berkshire still has a huge cash hoard. That earns Buffett some criticism -- but waiting for a better deal is something he has successfully done time and time again.

"When a management team with a reputation for brilliance joins a business with poor fundamental economics, it is the reputation of the business that remains intact."

A truly great business can survive with mediocre management. You should always consider that at some point, less-than-stellar management will find its way to the helm of any business.

Words to invest byFrom just these few simple words, you can develop a good framework for successful investing. Simply focus on investing in great businesses that you can understand, and then be patient. Do what Warren would do.